Altria eyes UST, but price in question -- sources

Brad Dorfman and Jessica Hall

CHICAGO/PHILADELPHIA, Feb 1 (Reuters) - A long anticipated deal by Altria Group Inc (MO.N) to buy smokeless tobacco company UST Inc UST.N could be reached within months, but the price remains the toughest sticking point, sources familiar with the potential deal said on Friday.

UST shares closed 5.8 percent higher on Friday amid market speculation a deal was looming, analysts and investors said. Altria stock shed 0.5 percent.

UST and Altria declined to comment.

Altria, which last year spun off Kraft Foods Inc (KFT.N) and plans to spinoff its Philip Morris International unit on March 28, has been seen for years as poised to make an acquisition in the smokeless tobacco market.

"The writing is on the wall, and has been on the wall for years, that this was the inevitable combination," said one consumer investment banker, who declined to be named.

"Altria has made no secret of its intentions for the smokeless market. But Altria had a lot of steps to make before they could make a move. Of course, in that time, UST's prize smokeless business has deteriorated some," the banker said.

UST recently posted a 1.4 percent rise in fourth-quarter profits, but suffered a decline in market share for its core smokeless tobacco business.

UST, which makes Skoal and Copenhagen tobaccos, is facing increasing competition from Reynolds American Inc (RAI.N) and Altria's Philip Morris USA unit.

Reynolds bought the Conwood smokeless tobacco business in 2006 and Philip Morris has been test-marketing a smokeless tobacco under the Marlboro brand. Buying UST, however, would give Altria an instant boost in that market to help diversify its revenue, analysts said.

"What's the quickest way to build share in smokeless tobacco? Just buy UST," said Morningstar analyst Gregg Warren.

Uncertainty remains, however, about how much of a premium UST's brands such as Copenhagen and Skoal can command over lower-priced competitors in the long-term, he said,

UST has been spending money on promotions to try to keep its customers from defecting to lower-priced brands by lessening the price gap between its products and competitor's brands in specific markets without actually cutting the list price.

UST, which has a market capitalization of $8.1 billion, would be a small acquisition for Altria, which boasts a market capitalization of $159.6 billion.

Fueling speculation Altria could be readying for a deal was the decision to announce only $20.5 billion worth of share buybacks, combined, by Altria and Philip Morris International. Analysts had said the the company had the balance sheet for much greater buybacks if management chose.

Altria Chief Executive Louis Camilleri said on Wednesday the amount of the repurchases was reached to leave the companies with financial flexibility.